The Kosovo Banker

Some strategies that might be followed in the payment industry during inflationary impacts!

ENEIDA THOMAJ - GENERAL DIRECTOR DREJTORE E PËRGJITHSHME PAYLINK ALBANIA

YES, it is true! The factors out of which the market and the payment industry is adapting itself, continue to be unpredictable and unprecedented. These factors had mainly negative effects, but even positive ones were noticed. The question that remains is, what will happen next? What will be our response when the market has inflationary impacts? When every conversation starts with the comment: Prices have risen!?

Payments have always given solutions for such scenarios and continue to give a “green light” during these times. Financial and non- financial institutions, including here even providers of payment services, has been in focus of regulatory compliance during the last 2-3 years as per the latest laws and regulations which has recently been approved. Just by observing the Albanian and Kosovo latest Regulatory framework drafted, which help towards increased market competition, corporate governance, financial inclusion and facilitating the use of means of payment, we understand the “burden” placed on the service payment providers. But on the other hand, this doesn’t imply that payment industry must lag on offering the alternative options to optimize payment channels. As far as the market requires it!

In the latest report of “The Great Payment Transformation” (emarchantpay, 2022), from 954 merchant, leaders in industries such as retail, airlines, travel etc., 91% of respondents confirms that they are experiencing loss in revenues because of the actual implemented payment solution.

Furthermore,53% of the respondent predicts an increase in revenues by around 4-6% in the next two years by implementing changes in the payment channels that they use. This indicator is more than enough to urge providing alternative payment channels. Merchants are asking for new solutions and they are ready to invest in such alternative solutions.

Naturally the next questions that comes to mind is, why are alternative channels being so popular now?

The simplest and straightforward answer is because costs are reduced! And everybody appreciates reduced costs. In developed markets like US and UK, recently there is an overgrowth of “closed loops” from merchants, where about 45% of fintechs and payment service providers are planning to launch such close loops, associated with a payment card, within 2022 (PaymentsCards&Mobile, May 2022). “Closed loops” operate through payment cards, issued from a specific merchant for the loyal customers of the merchant (in collaboration with a local bank, where the latter aims to lower the costs of license with international payment schemas through this collaboration). These cards are used in the merchant’s terminals (being physical terminals like POS, or online terminals) lowering this way processing costs of payment transactions because the latters are categorized as local transactions (eliminating this way interchange fees). This alternative local payment channel is expanded even more when a close loop is applied to some local merchants. These merchants enter in an agreement between them where they use co-brand cards, and loyalty schema are applied to the mutual customer portfolio of the merchants being in such schema. PayLink has offered similar solutions in Albania, where alike schemas are requested in industries such as gas/oil, markets, or even local banks. Furthermore, PayLink offers also “full” local solutions, implying here that a card is branded as PayLink Schema, and is accepted in all local terminals in a market, functioning within the same PCI standards of payment industry. Both options are valid in reducing IRF costs. The first option gives flexibility in card usage even out of the local territory where the card is issued, meanwhile the second option targets that specific customer segment who operate within the local territory. The selection of these alternatives remains within the discretion of the institution, based on the behavioral approach of its customer portfolio.

As per the above, these market needs in lowering costs, are orienting now toward “Card-as-a-service” solution. Institutions which do not have the necessary knowledge to launch and to manage cards, which do not want to invest in human resources and in infrastructure, are relying more on and more in their processors to get a total package of services. The latter, through collaborations that they have with international payment schemas and with other service payment providers which offer parts of the entire solution, are collaborating to propose “standard” package which include different elements such as licenses, API solutions, virtual cards, loyalty schemas, compliance services, card management systems and terminal management system, fraud monitoring etc. The latest report “Future Ready Payments Technology Reshapes the Playing Field for the Industry” (IDC Financial Insights, January 2022) emphasizes that 74% of payments performed from consumers will be realized from nontraditional financial institutions within 2030. This observation confirms the potential that both the markets of Kosovo and Albania have regarding “non-banking” consumer segments, being so a very good opportunity to target.

On the other hand, this doesn’t imply that the banking sector must stay behind in this regard. For the banks a decision has to be made as of now: To build with internal resources, or to collaborate with third parties for additional / innovative functions required from the market? In order to answer to this question, the latest report from McKinsey’s Global Banking Annual Review (December 2021), recommends continuous innovation and fast go-to-market for the banking institutions giving success story such as WeBank (launching around 1,000 updates per month in not more than 11 days from product idea to “go live”), or NuBank having an approach toward increasing financial inclusion by giving personal credit for individuals who don’t have a credit history. Without giving more arguments, it is understandable the answer to the question for the banks.

Concluding with a recommendation from Payments Innovation Jury, in the latest report “Innovation by Domestic Payments Systems in the Pandemic” (ECPA, April 2021): “Investment in systemic innovation is a must”, these times are imposing continuous change and as such banks and other institutions in the payment industry must implement such culture. There are many factors which have impacted in the increase presence of fintechs in the region, and in their better financial performance in the market (being such the ability to respond to specific client needs, but also the ability to benefit from the collaborations with processors, to optimize costs and time to market, in launching innovative products in the market). It is a necessity that even traditional payment institutions continue in the same pace, in order to keep their market position.

95+5+Q

91% OF RESPONDENTS CONFIRMS THAT THEY ARE EXPERIENCING LOSS IN REVENUES BECAUSE OF THE ACTUAL IMPLEMENTED PAYMENT SOLUTION.